Fears that China will build technology firms

WASHINGTON is working up a sweat over China’s industrial policies. There are fears that Beijing will build technology companies and advanced manufacturers capable of squashing US rivals by lavishing aid on favoured sectors.

Many of the tariffs the US plans to impose are aimed at products generated by this state-led agenda, most of it under the “Made in China 2025” programme.

Yet this is less scary than it sounds. History shows us that industrial policies seldom foster innovative or competitive companies. In important ways, they can do more harm than good.

The concept was all the rage in the 1980s – not because of China, but Japan. Some argued these policies were the secret sauce behind that nation’s meteoric rise on the world stage. They made the case that bureaucratic management and support for targeted industries created a super-competitiveness beyond the capabilities of the market. The US would have to copy Japan or die.

The fad eventually fizzled with Japan’s economy. After the asset-price bubble burst in the early 1990s and the nation tumbled into its “lost decades”, its economic model no longer seemed a world-beater.

Some economists had argued all along that the superiority of industrial policies was an illusion: their advocates were zeroing in on a handful of success stories and ignoring bigger failings.

Michael Porter and Hirotaka Takeuchi dissected Japan’s programme and determined that only a few sectors fostered by the state – steel, shipbuilding and semiconductors, for example – became internationally competitive. Others were busts, including chemicals, software and aircraft. – Bloomberg